Challenges to western economies
CHALLENGES and upheavals witnessed by the world during the last three years, mostly due to Covid19 and climate change and other on-going issues, are unprecedented. Every country from Australia to America and from Canada to Chad has seen trying times. The after effects of Covid19 still persist, giving rise to new economic turmoil and political instability. Every region, every country — rich or poor, developed or under-developed — is facing challenges, never seen before. Monetary systems are collapsing and currencies are in tail spin. In largest economy of the world — US, some banks in California had a rundown for cash from depositors and within days those Banks were closed as they didn’t have the money to give to their clients/depositors. J P Morgan, one of the largest Fund Management/holding firm have frozen the accounts of their clients. De-Dollarization is now posing a real threat to the American economy.
Go back in history — 15 years ago — same thing happened in the UK, where Northern Rock Bank witnessed huge lines of clients who wanted their money back and the Bank couldn’t pay the money and after three days the Bank was closed, prompting and igniting the worst economic crisis of this century (some call it the Great Depression of 21st Century). Similar but isolated scenes have been witnessed in China recently where banks have restricted paying cash to depositors. Is the current economic turmoil going to engulf the entire world and initiate a post-Covid19 global economic meltdown? The possibility seems to be very close to reality. Let’s have a glance at what is happening in Europe and Asia currently.
By far the least affected has been Asian region, economically. The current jolts are being witnessed in America and Europe where currencies are in tail spin. Recovery is expected in Asia’s economic growth as industrial activity and services are showing robust growth and appear reactivated and consumption rebounds. Thanks to a relaxation of COVID-19-related restrictions and the reopening of borders in many countries—with the notable exception of China. GDP growth in the region is expected to soften gradually over a period of 2024–35, though it will remain above the global average. Developing Asia will be the main driver of regional growth. There is a caveat, however: downside risks are rising due to a slowdown in external demand, rising inflationary pressures and the deterioration of the geopolitical environment due to war in Ukraine and other conflicts in the region and outside.
Demand will be sluggish due to economic crunch in the West and supply of raw material. However, with a strong rebound early this year, Asia’s economy is expected to continue its recovery path into 2023-2024. But the region is also facing mounting headwinds and businesses should prepare for continued disruption in the years ahead. Geopolitical volatility is rising, affecting energy and food security as well as global supply chains disruptions.
Asia’s economic prospects are expected to soften gradually over long-term forecast period (2024–35). Developing economies in Asia will have relatively higher growth potential than developed ones; thanks to rising domestic demand and continued improvement in technology and human capital. Facing these challenges, many Asian nations are increasing the role of their domestic markets in driving overall growth and shifting the focus of their export industries to markets closer to home.
War in Ukraine has sharply deteriorated the European economic outlook for 2023 and 2024. Soaring energy prices pushed overall inflation to double digits, plummeted consumer confidence and dented business activity amid reduced demand which is likely to tip the Euro Area economy into recession. More recently, the ECB’s decision to tighten its monetary policy has increased downside risks to the region’s growth prospects. Decades of declining defence budgets have led to a dramatic downsizing of European armed forces and generated major capability gaps. Competing national defence industries and diverging operational needs have also resulted in a deeply fragmented defence landscape where cooperative solutions are an exception, not the rule. Finally, endless debates on the need for, or the danger of, more European strategic autonomy have slowed down European ambitions and are still vivid today in the context of the war in Ukraine. Having a clear understanding of these limitations is critical as Europeans think about the future of their defence.
Despite the myriad of headwinds faced by the European economy, the recession may be relatively shallow and short-lived, given a strong and resilient labour market and the relatively healthy balance sheets on the part of consumers and businesses. Beyond 2024, the economy is likely to return to its slowing trend growth rate trajectory. Key risks around the longer-term outlook are internal tensions regarding the Euro Area architecture with slow growth in Italy and Spain and a more challenging global environment both through shrinking foreign demand and overall geopolitical tensions particularly on its eastern flank.
Businesses should prepare for continued volatility, as the energy crunch is unlikely to abate soon and will eventually lead to slower growth over 2024. Reducing electricity and gas usage, investing in renewable energy and infrastructure and improving energy efficiency and security (e.g., using on-site energy generation systems) can improve not only their overall environmental but financial performance too.
A recession may be inevitable but does not need to be deep and extremely damaging. Businesses should prepare for future growth, particularly as the energy transition evolves and supply chain disruptions eventually fade. Innovating their way out of crisis, prioritizing supply chain resilience and sustainability and enhancing their investment strategies toward greener solutions are key drivers of business growth and overall economic prosperity in the years ahead.
Business leaders need to adjust to a changing Euro Area labour market. More flexible working arrangements, re-skilling/up-skilling opportunities to boost workers’ productivity and a focus on the recruitment, retention and retraining of older workers will be essential for business leaders operating in the Euro Area. Even if income growth in the Euro Area is expected to under-perform the global average, the Euro Area remains a large consumer market. The region accounts for about 10 percent of global spending on goods and services (in purchasing power parity terms), a share that is only slowly decreasing.
The most recent and formidable challenge to Dollar and currencies of western countries making payments in US Dollars in trading, is from BRICS countries decision, led by China and Russia, to create their own common currency and stop payments in the US dollars. The decision has been made in principle at the last BRICS conference a few weeks ago and the announcement of the currency is scheduled in the next meeting in August. If that happens (and the chances are that it will materialize), the reign of Dollar will be in serious jeopardy and will set a shock wave from US to the rest of the world.
—The writer is Former Civil Servant and Consultant (ILO) & International Organisation for Migration.
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